05 October 2005

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Business Today

Tough times: no soft options

The convergence programme plans to cut the deficit from 9.7 per cent of GDP in 2003 to below three per cent in 2006 and a further drop thereafter.
It seems we shall have to endure more punishment before entering the rose garden. So what happens now that the electorate has been enticed by glittering tidings post membership – do we enter a phase of belt tightening for the duration of this legislative term?
Already prior to the reading of the 2006 budget we hear the chorus of the party faithful demanding the exchequer lighten the fiscal burden. While they plead to be spared the poison chalice in private they all concur, budget constraints demand otherwise.
This creates a feeling of déjà vu all over again. It appears as if we woke up to the news that the economy is buffeted with the pain of restructuring. Perhaps not every thing is doom and gloom. Certainly if the patient needs to take the prescribed medicine then citizens know that this is for the better. It is surreal to question why since the mid eighties we have not succeeded in winning the battle of the bulging deficits.
On a more practical level economists are raucous about the need for more productivity to redeem the burgeoning national debt, now exceeding 80% of GDP. Naturally Dr Gonzi is honest when he exhorts us to tighten our belts and improve productivity levels. He hit out at some civil servants who unmistakably put spokes in the wheels of reform programmes and imposed bureaucratic practices which stifled their growth. For example there is little appreciation for small and medium sized companies. He was quoted to say that "we all know that SMEs are very important for the economy and yet we find people in the civil service who are indifferent to the needs of the self-employed and small businesses".
This all goes to show that the White Paper on Public Service reform issued in October 2003 by Dr Fenech Adami needs revisiting. Hopefully this urgent matter is tackled once again by Dr Gonzi when he reads the 2006 budget. Yet, as an accession country we are not the only ones not to meet the Maastricht targets and if it is any consolation we note that Hungary have postponed entry into the Euro by two years following the correction of budgetary estimates. While Hungary is finding the post accession adjustment difficult others such as Poland started reaping the benefits.
One immediately notices how membership brought early benefits for the Poles. To mention a few examples one can point to improved economic ties between Germany and Poland. With the abolition of general customs controls there are new opportunities for Polish SMEs to expand towards Germany. To a significant extent with the advent of liberalisation, cross border business has flourished with sales of Polish food, cigarettes and drink to German border traffic. Petrol prices, a third cheaper than in Germany have lured German motorists to Poland.
Reverting back to Malta one expects the next budget to take cognizance of the need to rally the economy and boost consumer confidence. It goes without saying that unless the economy expands at a faster rate the tightening of public sector expenditure will have to be accelerated while more rationalisation on the revenue side becomes imperative.
While improving tax revenue is inevitable to plug the deficit one hears uproarious comments against further taxation from constituted bodies and unions. Although comparisons can be odious, in this case we cannot but help comparing our tax code with that of others. Last year, a report compiled by “The Business”, a UK newspaper, compared and contrasted the combined tax effect on the economy of 50 countries. Naturally the list included corporate, personal, wealth taxes together with employer/employee social security and VAT. Of the 10 accession countries Malta stands half way in the 31st position down the list of misery score. Most accession countries have restructured their tax systems by simplifying complex legislation and introducing lower flat taxes to lure inward investment. It is surprising that we note Slovenia scored the 11th; Czech Republic 13th; Hungary 17th; Poland 21st; Slovakia 29th; Estonia 32nd ,Lithuania 35th and Latvia 37th. While our GDP is neck and neck with Cyprus yet we note that Cyprus checks in as the third best place to live as far as taxes go while the second and first place go to Hong Kong and UAE respectively. Inevitably our pivotal challenge would still remain that we must try to attract investment through better and more effective fiscal transparency.
For example, Cyprus charges 15% on corporate profits which is an attractive rate to encourage direct foreign investment. Experts at the ministry of finance can do the sums and try to come up with a revitalised and simplified tax structure that cleans up the loopholes and leaves room for rewarding initiative. Any ingenious and “out of the box” solution can further cement our advantages as an investment location.
Malta’s financial system is well placed to benefit from EU membership. In particular, Malta is well positioned to serve as a bridgehead between Europe and North Africa. The recent emergence of Libya on the international scene after lifting of commercial sanctions by US labels it as a country with considerable oil wealth and untapped opportunities. Indisputably Malta has long maintained close commercial ties with our neighbour and in theory combined with our favourable stance with the USA this should open up further opportunities.
Everybody hopes that this week’s visit by Dr Gonzi to the Whitehouse will further develop commercial relationships with the US, possibly culminating in the signing of a double taxation agreement. If we attract the patronage of US investors we hope to become a bridgehead for more coordination centres for major oil companies targeting Libya. Is this our golden chance to turn a new leaf?
Party apologists are pointing to a rally in the economy. While a swallow does not make a summer it is interesting to see a 2.4% increase in GDP was registered in the second quarter. Let us hope that this momentum is maintained in the subsequent quarters.
One may ask what can the prime minister do to help mitigate the growing pains and smoothen the stretch marks? There is no quick fix solution. The opposition say he must seriously consider reshuffling the cabinet of ministers and possibly regrouping the portfolios to ensure a smaller but more effective team. Political observers argue that unless the reshuffle is done this month then the chance of making headway with a new stable of ministers will disappear. To become really effective a revamped list of back benchers would need at least two years to start reaping the fruits of any reforms. Their task will be arduous but a new broom sweeps clean and if successful they would enjoy the backing of the electorate.
It goes without saying that a new cabinet will take unequivocal decisions on hot issues such as the deficit, environment, health reform, pensions, competitiveness and job creation. The opposition always lament that without the necessary reshuffle, an era of lassiez faire will prevail attracting unbridled bureaucracy . They say that the situation quite often leads to sleaze and corruption in high places.
In the coming eighteen months prior to joining the Euro club we have no soft options. Either we own up to a higher level of efficiency or face a crash landing.

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Editor: Kurt Sansone
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